Why Big Price Discounts Don’t Always Make Great Deals
Do you like a bargain? I do! I’m all about finding great deals, especially if they’re real estate related. After all, a dollar saved is a dollar made, right?
While a big price reduction is sure to tickle your greed gland, the discount may not really be genuine. It could be ‘deal bait’ – something savvy sellers use to attract buyers.
For instance, one of the deals I’m weighing up purchasing at the moment is a 500 square metre office and warehouse commercial property. It was originally listed for $600k+, but the agent let me know on the sly that his seller is becoming more and more motivated and that $425k would probably buy it now. Oh! Oh! Oh! A $175,000 discount! That’s got my attention.
Loading up my due diligence number-crunching spreadsheet (find out how you can get a copy here) I quickly inserted the variables. I was a little crushed when the ‘bottom line’ revealed the most I should pay and still expect my desired profit is $400,000. So I wrote back to the real estate agent saying that I was close, but that the best I could do was still $25,000 less than what his seller might accept. He said that that was too low for his seller to consider favourably.
This short case study reveals the following six learning points:
1. A discount does not guarantee a great deal.
Property sharks love to smell blood in the water, but a discount in and of itself doesn’t guarantee a good deal. In most cases, a big discount simply reflects that the seller started at an unrealistically high list price and the subsequent adjustment is the equivalent of the market saying, “Tell him he’s dreaming.”
2. A discount should not stop further negotiation.
Just because a property has already fallen in value shouldn’t stop you trying to negotiate an even bigger price reduction. Yes, you may hear the agent say “But they’ve already dropped their price by <insert amount>!” However, the price you pay should be what you need in order to make your desired profit, not what the seller needs to feel good about their sale.
When I make an offer that is less than the asking price I often say, “Don’t make it personal and don’t take it personally.”
3. A discount does not subvert the need for due diligence.
If you think you’re getting a great deal, you may be tempted to fast-track or hijack your pre-purchase due diligence in your haste to stitch up the sale. Don’t! You may think you’re buying cheap, but if you rush and miss something important, then once you’ve paid to fix it the deal might not be nearly as good as first thought. As the old adage says: Hasten slowly!
4. A discount does not mean you’re buying under market value.
Sometimes a buyer will mistakenly think a big discount means they are buying below market value. Oh please! Think about that for a minute… you are the market, so what you pay will be the market price. While you can purchase below replacement cost, or below the independently appraised price, you cannot ever buy below market price.
5. A discount does not mean you’ve made money from day one.
A discount is not the same as a cash profit. Think of buying as opening the investment position and selling as closing the investment position. It’s what you do after you’ve bought and before you on-sell that unlocks the profit. In order to convert your discount to cash, you will need to find someone willing to pay more for it than you did. Being able to do that requires that you know a thing or two about the art of investing.
6. A discount does not mean the deal is problem free.
On the contrary – a property that must be discounted tends to have one or more problems that need to be fixed before the property will be profitable. A good example that comes to mind is a large discount I negotiated (equivalent to one year’s rent) on a two-tenant commercial property. When I purchased the property, it was 50% occupied. A year later and, despite my best efforts, it is still 50% vacant. It seems I overestimated how easy it would be to fix the problem.
Don’t misunderstand me… getting a discount is usually better than having to pay a premium. Just be careful that you aren’t being distracted by pretty plumage on what is otherwise an ugly property duck.
Have you ever received or negotiated a big discount on a property that you thought was great, only to later discover it wasn’t as good as you hoped?
Be brave and share your story by posting a comment.
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